Will a price decline cause a tragic reduction in ag’s safety net?
Notice that often the large decline in base price follows years when there has been a large increase in the base price. The exception and the most difficult to manage would have been the price declines from 1982-1987. This was a period when farmers were under a severe financial crisis, causing many forced farm sales. Only the drought of 1988 changed the direction of price movement.
Summary. The other factor that will affect the revenue guarantee in the following year is a change in the APH yield. If the current year’s yield is low and replaces a higher yield from the 10-year history, then the revenue guantee will fall by more than just the price decline. However, APHs may also increase and that will reduce the impact of any price decline.
Clearly a lower base price in most cases will cause a decline in the revenue guarantee. It is rare for the base price to fall by more than 20% from the prior year, and the effect can be limited if the APH has increased. Over 93% of the RP corn contracts have a deductable of 20% or more. When combined with a low strike price, one has the argument for supplemental coverage or a target price. However, this is a rare event and any additional coverage could be targeted to cover this rare event.
Currently there is a limit on how much the APH can decline from the prior year and that limits some of the reduction in annual revenue guarantees. A public policy that would take the next step and limit the base price reduction from the prior year would target any “supplemental” program to the actual “hole” in the revenue insurance contract. For example if the price decline were limited to 10% from the prior year, it would only affect corn and wheat in 9 out of the last 38 years (10 years for soybeans). Even then, when the 10% cup had an effect that does not mean farmers would collect because they can always produce their way out of a loss.
Table 1. Crop Insurance Base Price Percent Changes from the Prior Year*
Prepared by G. A. (Art) Barnaby, Jr., Professor, Department of Agricultural Economics, K-State Research and Extension, Kansas State University, Manhattan, KS 66506, December 19, 2012, Phone 785-532-1515, e-mail – firstname.lastname@example.org.
Disclaimer: This web page is designed to aid farmers with their marketing and risk management decisions. The risk of loss in trading futures, options, forward contracts, and hedge-to-arrive can be substantial and no warranty is given or implied by the author or any other party. Each farmer must consider whether such marketing strategies are appropriate for his or her situation. This web page does not represent the views of Kansas State University or Drovers/CattleNetwork.